China is set to allow its banks to convert loans into securities in an effort
to boost lending as its economy begins to slow.

Up to Rmb50bn (£5bn) of loans could be taken off lenders’ balance sheets, according to reports citing Chinese bank executives, as policymakers in the country look for ways to encourage lending.

Earlier this month, China cut interest rates for the first time since 2008 amid signs of an economic slowdown that some fear could turn into a full-scale financial crisis.

“It is looking very nasty. This could very well turn into the 'hard landing’ everyone has been worried about,” said one credit analyst.

The removal of loans via the securitisation programme would free up capital on banks’ balance sheets for further lending but analysts have questioned how effective it would be. The programme would represent less than 1pc of the combined balance sheet of China’s banks.

The problem is being exacerbated by tougher competition for domestic deposits, which have until recently faced little competition from rival savings products.

“It is undoutedly true that for the first time in many years banks are grappling with an unfamiliar challenge – how to mobilise the deposits they need to fund their desired rate of loan growth,” said analysts at CreditSights.

Some smaller Chinese lenders have already hit the country’s 75pc loan-to-deposit ratio, forcing them to stop lending. While most of China’s Big Four banks are still some way off this lending ceiling, Bank of Communications, which is partly owned by HSBC, has a ratio in the low 70s.

China has in recent years sought to keep a grip on lending to prevent the growth of a property bubble some fear is close to bursting.